In the past fortnight, both the Prime Minister and the finance minister have spoken of a coming exit from the easy money regime and the end of the fiscal stimulus.
India isn’t the only country wrestling with the timing and wisdom of an exit policy. After all, the world looks like a better place than it did at around the same time last year.
Illustration: Jayachandran / Mint
The US economy expanded last quarter—the first time it did in a year—and while unemployment data from that country indicates the worst job market in 26 years, the overwhelming feeling around the world is that the worst is indeed over.
Other data points and anecdotal evidence would seem to indicate the same. Summer placements at B-schools (long seen as a lead indicator of final placements) have been good, although not enough attention is being paid to the fact that they were as good in 2008 before what financial analysts call the perfect storm struck.
Still, any decision to move from an easy money policy would have to be a function of two variables: inflation and demand. On inflation, there is some degree of consensus that India could see wholesale and consumer prices rise to fairly high levels by March. Indeed, some of these prices are already high. On that basis, there’s enough of a case for a tighter money regime and an end to the stimulus. So far, so good.
Demand, too, has seen an increase across sectors. However, the real issue is whether this demand has come about because of an improvement in consumer sentiment or whether it has come about because of the economic stimulus.
The unfortunate thing is that most people, including economists and executives, aren’t sure. While they accept that the increase in demand in some categories such as motorcycles is because people have more money and are confident about the future, they admit that in many other categories, the demand is largely a result of the government’s actions.
So why are the Prime Minister, the finance minister and the governor of the central bank convinced about the need for a tighter money regime?
Maybe it’s because of the sharp revival in the bubbles business. All too suddenly, bubbles are building up in the stock market and in real estate (and on the basis of recent anecdotal evidence, in the job market here, too).
A tighter money policy could hurt growth prospects, but it will definitely burst most of the bubbles in the making. That could well be the benefit of the policy that India has now decided to adopt.
Is India ready for the end of the fiscal stimulus and a tighter money regime? Tell us at firstname.lastname@example.org